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ESG: How to Include 'Social Responsibility' in Your Portfolio

ESG isn’t a one stop investment theme. Its evolution and growing adoption across the corporate world has sparked an expanding list of choices for investors. Among them are broad ESG focused funds as well as strategies and stocks that are levered to particular trends (solar, for example). Tornado breaks down some of the choices and considerations here. As we discuss in a companion blog, ESG has made a major leap. After a record-setting $21.5 billion in the first quarter of 2021, ESG funds saw $17.5 billion in new investment in 2q21 and another $15.7 billion in inflows in 3q21. While that’s impressive, Deloitte argues that ESG’s “full potential has yet to be realized.” It predicts that “ESG assets in the United States could grow almost three times as fast as non-ESG assets to comprise half of all professionally managed investments by 2025.” If you’re ready to incorporate ESG into your investment strategy but don’t know where to start, here are some things to consider. ESG Investment Spectrum Many companies now publish sustainability reports, which can help guide you, as can the independent ESG ratings issued by MSCI, Refinitiv, Sustainalytics, and other firms. A first step is to review the ESG commitment of individual companies and invest in those whose sustainability, social, and ethical priorities match your own. These can be found on company websites and in “sustainability reports” that are released by many companies annually. Likewise, you can divest companies whose ESG priorities materially differ from your values. A second option is to invest in ESG-related mutual funds or exchange-traded funds (ETFs), which are now available through most investment firms, including iShares, Nuveen, Parnassus, TIAA, and Vanguard. As Kiplinger notes, there are funds that meet just about any ESG priority. You can also target firms that are more directly associated with or involved in one or more areas of ESG. For example, if climate change is your biggest priority, you can invest in renewable energy stocks, solar energy stocks, or infrastructure stocks, depending on your preference. ESG can be broken down into multiple subcategories or themes. Within the broader environmental theme, ESG investing can focus on reducing the risk of climate change, natural resource erosion, or pollution and waste. For example, Nasdaq suggests that, “EV charging points could eventually be the gas stations of the future.” Investors can buy stock in companies building, owning, or operating them. For those interested in balancing the stocks in their portfolio with bonds, Barclays agues that government projects related to things like green hydrogen, cycling and rail links, and building retrofits are feeding the supply of ESG-labeled bonds. The same is true for other aspects of ESG. Under the social theme, you can focus on investments related to community involvement or invest in companies that are prioritizing diversity, equity, and inclusion on their boards and throughout their staffs. As for governance, you might choose to invest in companies based on their commitment to transparency or decisions about executive pay. In addition to sustainability reports put out by particular companies, a number of agencies now release ESG ratings to help guide investors. ESG Purity As with any emerging concept, investors will have to do some careful homework to ensure they’re on the right path. The Securities and Exchange Commission (SEC) recently warned that the lack of standardized ESG definitions can confuse investors, especially given its discovery of potentially misleading marketing by funds. The Wall Street Journal has pointed out that one source may rate a company high on ESG, while another source may rate that same company low, which raises deeper questions about ESG rating efficacy. As an investor, try to verify company claims, knowing that some profess to be green while still involved with fossil fuels or socially focused despite a lack of diversity. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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